Opposition of indigenous populations and ecologists to the development of primary resources

Risk assessment

Activity will be strongly affected by low oil prices and the earthquake in early April

The Ecuadorian economy, largely dependent on public spending from oil revenues, felt the negative impact of falling oil and gas prices and moved into recession in the second semester of 2015. After Venezuela, Ecuador was the country in Latin America the most severely impacted by the fall in crude oil prices. In 2016, activity is expected to suffer again with the persistence of low oil prices and the loss of competitiveness of its non-oil exports, as a result of the strengthening on the US dollar against the Colombian peso and Peruvian sol (main trading partners in the area). The earthquake in early April should deepen further economic recession and would cost 3.3 billion dollars (0.3 % of GDP). The epicenter was located near Pedemales, Ecuador’s center for shrimp farming (world’s biggest exporter), which should curtail aquaculture production. The government’s lack of resources is also likely to lead to a reduction in public investment whilst private investment will also suffer from the decline in the availability of credit as the banks provide funding in priority to the public sector. Household consumption is likely to remain weak, under the effect of rising unemployment, freezing wages and the increasing of some taxes and import restrictions. The slowdown in domestic demand should however lead to a reduction of inflationary pressures in 2016.

Further budget cuts after earthquake

Low oil price, responsible for over one-third of budget receipts, forced the government to instigate measures to limit the rise in the public deficit (freeze on public sector wages, higher taxes and duties on imports, cut subsidies). The April earthquake has increased further the State financing needs. The country intends to cover these requirements through additional loans from China, as well as from multilateral institutions (IMF, World Bank). A series of new measures was also announced to finance a part of the rebuilding effort (new receipts estimated at one billion dollars): VAT rate will be increased by 2 percentage points for one year (at 14 %), corporate tax will rise by 3 percentage points (at 25 %), some employees will temporarily pay an addition tax of their income and an additional exceptional contribution on wealth tax. President Correa announced his intention to privatize new assets by end 2016 in order to meets its financing needs. The country could also tap international markets, but only at a higher cost. The public debt is therefore set to reach 38 % of GDP, just below the legal threshold of 40 % provided by the Constitution. The majority is held by China, with loans guaranteed by the granting of mining concessions, oil revenues and future electricity production.

Current account continues to suffer from falling oil and gas exports

The current account deficit should continue to grow in 2016, as a result of the worsening balance of trade due to lower oil prices and the appreciation of the dollar (Ecuador is a dollarized economy). The trade in petroleum and related products represents almost 50% of the country’s exports and 20% of its imports. Despite the appreciation of the dollar which is making imports cheaper, these should also fall, given the increase in import taxes and duties applied as of March 2015, as well as because of the slowdown in domestic demand. The balance of services will remain in deficit, the costs of freight and services paid to foreign companies will exceed tourist income. The income balance is feeling the impact of the significant capital withdrawals and FDI, which are declining, will not be enough to finance the current account deficit.

The President Rafael Correa renounces to be a candidate in the next presidential elections

The next presidential and parliamentary elections in Ecuador are scheduled for February 2017. The President, Rafael Correa, of the Alianza Pais (PA) party expressed his wish to not be a candidate. Although the Constitutional amendment allowing him to stand as many times as he wants has been voted, the reform will not go into effect until 2021. The likely candidate expected to succeed him seems to be his former vice president, Lenin Moreno. Maintaining the power of the PA is however uncertain because government has to deal with divisions that have emerged within his ruling majority and the decline in the government popularity.

The business climate is likely to remain mediocre despite the adoption of the reforms, tax incentives, aimed at attracting private investment. The lack of recourse to international arbitration courts, State interventionism, as well as the ongoing fall in commodity prices are all reducing the attractiveness of the country.